WASHINGTON, July 30: The International Monetary Fund expressed confidence on Friday for short-term US economic prospects but warned of several challenges ahead, including high oil prices. In an annual review, the IMF said it expected the US economy to grow by 3.5 percent in 2006, down from a forecast given in April of 3.6 per cent. It left its forecast for this year unchanged at 3.6 percent.

Directors observed that, while subject to risks, the near-term outlook for the US economy remains broadly favourable, the IMF board said. However, directors cautioned that higher oil prices could begin to weigh more heavily on domestic demand, it said.

US consumers have so far shrugged off the effects of record-high oil prices, which stand at around 60 dollars a barrel. Figures out Friday showed the economy grew by 3.4 percent in the quarter to June, down marginally from 3.8 percent in the previous three months but still a robust pace.

But the IMF said that among other danger signs for the world’s largest economy are “the rapid inflation of US house prices in recent years”, a high current account deficit and an “extremely low” national savings rate.

In addition, a swollen US budget deficit makes it all the more urgent that the administration of President George W. Bush tackle its finances. Turning to monetary policy, the IMF commended the Federal Reserve’s policy of measured rate hikes to combat oil-fuelled inflation.

It said a more aggressive pace of interest rate hikes could not be ruled out if price pressures increase. The IMF welcomed White House projections for the yawning US budget deficit to fall to 333 billion dollars this year thanks to better-than-expected tax receipts.

Nonetheless, most directors considered the administration’s goal of halving the budget deficit to be relatively unambitious, as this would imply limited adjustment in the structural fiscal position in coming years. It is also subject to considerable risk, given the assumption of an unprecedented compression in non-defence discretionary spending.

The White House wants to halve the deficit by 2009 after it hit a projected record-high of 521 billion dollars in the 2004 fiscal year, or 4.5 per cent of gross domestic product (GDP).

Bush inherited a budget surplus from Bill Clinton when he took office in 2001, but the United States has sunk into the red owing to hundreds of billions of dollars in tax cuts coupled with military spending in Iraq and Afghanistan.—AFP